What Princeton Tuition Freeze Means -- and Doesn't Mean

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For the second time in seven years, a highly visible and prestigious private institution has announced a decision not to increase tuition. In 2000, Williams College announced a tuition freeze for the coming academic year, and in 2007 Princeton University did the same. In both cases, the institutions cited substantial endowment gains as a central reason allowing them to hold tuition constant for one year. What are we to make of these episodic pricing decisions?

In the Williams case, I was familiar with the thinking of the leadership, and I believe it was a clear attempt to send a signal to peer institutions that price increases in the face of sharply increasing institutional wealth were undermining public trust in higher education. I wrote at the time that, “If peer institutions do not follow suit, Williams will almost surely be forced to resume tuition increases next year. And, within a couple of years, the entire incident will be forgotten.” Indeed, that is precisely what happened.

I am not privy to the thinking that motivated the Princeton decision, but I do not sense from their public statements that they are trying to send market signals, or to lead others to emulate their behavior. In fact, the purity of their tuition decision was complicated by a large jump in room and board charges, so the net effect is to raise their total charges by $1,780 (4.2 percent), an increase greater than gains in the CPI. I see no reason not to take their public explanation at face value -- they have experienced excellent endowment returns, and in 2006 their board authorized increased spending from the endowment. With non-tuition revenue rising, they were able to meet anticipated financial needs for the coming year without an increase in tuition. They used this opportunity to bring expenses of room and board more closely in line with revenue, thereby reducing a subsidy they had been providing to room and board in recent years. In short, they took advantage of a favorable moment to (in their words) “‘true-up’ their operating budget.”

While Princeton is larger and may carry more punch in the world of higher education than Williams, I will be very surprised if this decision triggers an onslaught of emulation. Only a tiny number of extraordinarily wealthy institutions could even consider following, and it is unclear why they would do so. The distributional consequences of the Princeton decision could be viewed as analogous to the early Bush tax cuts, in that the benefits will accrue to the very wealthy parents who pay full tuition, not exactly a blow for greater equity. If a small number of similarly wealthy colleges and universities did the same thing, it is hard to work up much enthusiasm for the virtue of the resulting redistribution of income.

Leaders of those institutions that could afford the same decision have to consider the opportunity costs involved. Might there not be better uses of the extra dollars raised by tuition? For example, not all wealthy institutions have followed the lead of Princeton and others in providing full scholarship support to those low-income students who are admitted, but cannot conceivably afford to attend without full support. Allocating funds to that purpose would seem to be a far better use than simply freezing tuition for all enrolled students for one year. Wealthy universities might also take this as a year to provide direct assistance to high schools -- especially those that can’t afford to provide good college counseling that might make the difference in whether an exceptionally able high school student who doesn’t come from a college-going family can find out about the opportunities to attend a Princeton or another top college. One can easily imagine socially beneficial uses of funds that would compete strongly against a tuition-freeze at highly selective universities.

One counter-argument to the above takes us back to the motivation behind the Williams decision in 2000. If the entire Ivy League plus Stanford, Northwestern, Chicago, Emory, Amherst, Williams, Swarthmore, and other similarly wealthy colleges and universities were to fall in line with the Princeton decision, pressure to contain tuition would be felt further down the chain of institutions, and might slow the rate of tuition growth for all. Would that be a net benefit to society at large?

Certainly such a move would gain political plaudits for a sector that has been sharply criticized for years for its pricing behavior. On the margin, access and opportunity might be modestly increased for potential students of limited means. It is far from clear, however, that such an across-the-board approach would be as efficient as more effective targeting of financial aid on those with substantial need. The majority of private colleges that depend heavily on tuition would be hurt, and some might close. As a former president of Kalamazoo College and board member at Goucher and Sweet Briar Colleges, I can attest that the vast majority of private colleges are far more dependent on tuition than is Princeton. To provide perspective, a typical private college endowment would be in the range of $130 million, while Princeton’s $13 billion is 100 times larger.

And, to be effective, the group of institutions exercising this price leadership would have to commit to a multi-year form of restraint, such as a group decision to limit tuition increases to no more than some objective index, such as the CPI. Holding tuition unchanged for only one year would not do the job.

The implausibility of coordinated decisions by multiple independent boards of trustees willing to commit to a 5- or 10-year tuition limitation to break the back of the “arms race” in higher education must give one pause. Competition in higher education simply does not work to control prices as happens in most for-profit industries. Colleges are not seeking market share, but rather increased quality and prestige. Families and students seek institutions that provide those attributes, and are willing to pay for them. My essay about the Williams decision in 2000 referred to the “Cockeyed Economics of Higher Education,” a phrase that is still apt.

I conclude, therefore, that the Princeton decision in 2007 is another one-time event with little lasting significance. A year from now we will hardly remember it, and nothing fundamental will have changed in the financing of higher education. And, as the remarks above suggest, I am at best ambivalent about that likely outcome.

Bio

David W. Breneman is University Professor, and Newton and Rita Meyers Professor in Economics of Education, and dean of the Curry School of Education, at the University of Virginia.